Monday, January 1, 2018

The Point of Maximum Gain


Tom Hickey links to Brad DeLong, who quotes Maynard Keynes quoting Malthus:

... there must be some intermediate point, though the resources of political economy may not be able to ascertain it, where, taking into consideration both the power to produce and the will to consume, the encouragement to the increase of wealth is the greatest…

There must be some intermediate point, Malthus says, at which economic growth is best. You know what that is? It's a Laffer Curve for growth. Similar to this:

Graph #1: via Naked Capitalism
The thought catches my eye because I say something similar about debt. I say too much debt is a problem. And not enough debt is a problem. And there must be some intermediate point where debt is just right: where the benefits of credit use outweigh the costs of accumulated debt by the greatest amount, and growth is maximized.

The benefits and costs depend not only on the size of accumulated debt but also on the relative size of public and private accumulations. Policy, in other words, needs to keep one eye on public debt, one eye on private debt, and a third eye on the ratio of private to public debt. A one-eyed policy that attempts to manage only public debt will never restore health and vigor to our economy.

My estimate suggests that we get the most benefit from an increase in debt when we have about $1.50 of debt for every dollar of GDP. And the best distribution of this debt is to have non-Federal debt between two and three times the size of the Federal debt. So, for one dollar of GDP we want 40 to 50 cents of Federal debt and $1.00 to $1.10 of debt other than Federal. These are ballpark targets for maximizing economic growth.

1 comment:

The Arthurian said...


That third eye, that's the eye of wisdom.